FDI and Trade in GVCs Preliminary Findings on Investment and Value Added Trade in the Global Economy Latin America s entry in the global offshore service industry Masataka Fujita, Head, Investment Issues and Trends Branch Division on Investment and Enterprise UNCTAD Geneva, 9 April 2013 0
Contents Value added trade in the global economy GVCs: the trade-investment nexus The development impact of GVCs The way forward: a policy analysis agenda 1
Value Added Trade: how does it work? Value chain Domestic Value Added in exports Foreign Value Added incorporated Participating countries Raw material extraction Processing Manufacturing Final demand Gross exports Domestic Value Added Doublecounting Country A 2 2 2 0 Country B 2 + 24 = 26 Country C 26 24 2 2 + 24 + 46 = 72 Country D 72 46 26 100 72 28 2
How much value added does global trade actually generate? Global value added in trade, 2010 $ Trillions ESTIMATES ~19 ~5 28% ~14 Global gross exports Double counting (foreign value added in exports) Value added in trade Source: UNCTAD-EORA GVC Database, UNCTAD estimates. 3
Which countries use more imported value added to generate their exports? Foreign value added in trade, by region, 2010 Global Developed Economies EU United States Japan Developing Economies Africa Asia East and South-East Asia South Asia West Asia Latin America and Caribbean Central America Caribbean South America Transition Economies Memorandum item: Least Developed Countries 11% 18% 14% 11% 16% 14% 13% 14% 21% 21% 22% 28% 31% 27% 30% 31% 39% Developing country average Source: UNCTAD-EORA GVC Database. 4
Which sectors have the most segmented value chains? Share of foreign value added in exports, by sector, 2010 Primary 9.6% Secondary 29.4% Tertiary 14.2% Source: UNCTAD-EORA GVC Database. 5
Which industries have the most segmented value chains? Share of foreign value added in exports, top 10 industries and top 5 services industries, 2010 1 Manufacture of office, accounting and computing machinery 2 Manufacture of motor vehicles, trailers and semi-trailers 3 Manufacture of radio, television and communication equipment 4 Coke, petroleum products and nuclear fuel 5 Manufacture of man-made fibres plastics and synthetic rubber 6 Manufacture of electrical machinery and apparatus n.e.c. 7 Manufacture of other transport equipment 8 Rubber and plastic products 9 Manufacture of basic chemicals 10 Metal and metal products... 27 Construction 28 Research and development 30 Electricity, gas and water 31 Post and telecommunications 38 Finance 0 10 20 30 40 50% Source: UNCTAD-Eora GVC Database. Note: Based on 42 industries at various levels of industry classification. 6
How much does value added trade contribute to countries GDP? Domestic value added in trade as a share of GDP, by region, 2010 Global Developed Economies EU United States Japan Developing Economies Africa Asia East and South-East Asia South Asia West Asia Latin America and Caribbean Central America Caribbean South America Transition Economies Memorandum item: Least Developed Countries 18% 12% 13% 18% 16% 14% 22% 26% 28% 30% 25% 24% 22% 27% 30% 26% 37% Source: UNCTAD-EORA GVC Database. Developing country average 7
Which regions participate more in GVCs? 8
Which countries show the highest GVC participation? 9
Contents Value added trade in the global economy GVCs: the trade-investment nexus The development impact of GVCs The way forward: a policy analysis agenda 10
What is the role of TNCs in shaping value added trade patterns? Global trade (exports of goods and services), by type, 2010 $ Trillions ~19 ~4 ESTIMATES Total trade within the international production networks of TNCs: ~80% ~15 ~6.3 ~2.4 ~6.3 Global trade in goods and services Non-TNC trade All TNC-related trade Intra-firm trade NEM-generated trade TNC arm's length trade Source: UNCTAD estimates, based on WIR12 (table I.8); BEA; EFIGE; Altomonte et al. 2012. 11
What is the role of TNCs in shaping value added trade patterns? Services 22% 46% 64% Manufacturing 71% 43% 26% Primary sector 7% 11% 7% Gross exports Value added inputs to exports Inward FDI stock Source: UNCTAD-EORA GVC Database, UNCTAD FDI Database. 12
How does FDI affect countries GVC participation? Correlation between levels of inward FDI stock and GVC participation Source: UNCTAD-EORA GVC Database, UNCTAD FDI Database, UNCTAD analysis (based on datapoints for 187 countries over 20 years). 13
How does FDI affect countries GVC participation? Key value added trade indicators (median values), by quartile of FDI stock relative to GDP, 2010 Foreign value added in export GVC participation Contribution of value added trade to GDP 1st quartile (Countries with high FDI stock relative to GDP) 34% 58% 37% 2nd quartile 24% 54% 30% 3rd quartile 17% 48% 24% 4th quartile (Countries with low FDI stock relative to GDP) 18% 46% 21% Source: UNCTAD-EORA GVC Database, UNCTAD FDI Database, UNCTAD analysis (based on 180 countries). 14
Contents Value added trade in the global economy GVCs: the trade-investment nexus The development impact of GVCs The way forward: a policy analysis agenda 15
What is the impact of value added trade and GVCs on development? Correlation between growth in GVC participation and GDP per capita GDPpc 7 8 9 10 11 GVC Participation vs GDP per Capita Developed Countries - logs GDPpc 4 6 8 10 12 GVC Participation vs GDP per Capita Developing Countries - logs 10 12 14 16 18 20 GVC participation 10 12 14 16 18 20 GVC participation Source: UNCTAD-EORA GVC Database, UNCTAD analysis (based on datapoints for 187 countries over 20 years). 16
What is the impact of value added trade and GVCs on development? GDP per capita growth rates for countries with high/low growth in GVC participation, and high/low growth in domestic value added share, 1990-2010 + n.n% = median GDP per capita growth rates High + 2.2% + 3.4% GVC participation growth rate ʺIntegrating in GVCsʺ Low + 0.7% + 1.2% Low High Growth of the domestic value added component of exports ʺIncreasing dmoestic value addedʺ Source: UNCTAD. * Data for 125 developing countries, ranked by growth in GVC participation and domestic value added share; high includes the top two quartiles of both rankings, low includes the bottom two; GDP per capita growth rates reported are median values for each quadrant. 17
What different GVC development paths can be distinguished? CONCEPTUAL ʺUpgradingʺ + 2.2% + 3.4% ʺIntegrating in GVCsʺ ʺEngagingʺ ʺConvertingʺ ʺLeapfroggingʺ ʺCompetingʺ + 0.7% + 1.2% ʺPreparingʺ ʺIncreasing domestic value addedʺ Source: UNCTAD. 18
Major preliminary findings Global investment and trade are inextricably intertwined through the international production network of firms GVCs are responsible for the growing significance of double counting in global trade figures GVCs make extensive use of services (almost 50% of value added inputs to exports is contributed by service sector activities) The majority of developing countries, including the poorest, are increasingly participating in GVCs Countries with a higher presence of FDI relative to the size of their economies tend to have a high level of participation in GVCs (and a greater relative share in value added trade compared to their share in global exports) GVC links in developing countries can play an important role in economic growth There appear to be a number of distinct GVC development paths for developing countries 19
Contents Value added trade in the global economy GVCs: the trade-investment nexus The development impact of GVCs The way forward: a policy analysis agenda 20
The way forward: a policy analysis agenda Some key questions to answer: What are the implications of new insights on GVCs for investment and trade theory? What are the drivers and determinants of investment in GVCs? Should developing countries adopt specific policies in their development strategy to increase GVC participation? If so, under what circumstances, with what criteria? UNCTAD will aim to answer these and other questions in the World Investment Report 2013 to be launched on 26 June What policies can maximize the benefits and minimize the negative effects of GVCs? 21